LPKF is a German company with a focus on innovative laser technology. With this technology, LPKF offers innovative solutions. The company CFO Christian Witt gave us insights into the future plans of the company.
We have discussed the following topics:
Table of contents
- 1Introduction to LPKF
- 2History of LPKF: The laser specialist
- 3LPKF’s problem-solving
- 4Explanation PCB
- 5The precision of laser technology
- 6The solar technology
- 7The beginning of LPKF
- 8Laser processing
- 9Keeping the competitive edge
- 10Gaining and filtering information
- 11The different business units of LPKF
- 12Recruiting talent
- 13The deal with profitability & scaling
- 14The sale cycle
- 15Reaching out to potential partners
- 16Self-understanding as a supplier
- 17Learning curves
- 18Considering external factors
- 19Recurring revenue
- 20Community exclusive: customer concentration
- 21Transitioning to service
- 22Service in smaller markets
- 23Acquisitions in LPKF
- 24Skin in the game
- 25Closing thoughts
- 26Thank you
Introduction to LPKF
[00:00:35] Tilman Versch: Dear viewers of Good Investing Talks. It’s great to have you back, as you might already know, I’m currently looking into some interesting European companies that might be too cheap in this current gas crisis, and one of these companies is called LPKF and I’m very happy to have a representative here, Mr Christian Witt, it’s great to have you here.
[00:01:00] Christian Witt: Thanks, Tilman. I’m happy to be here.
[00:01:03] Tilman Versch: You’re based Garben, if I’m right?
[00:01:06] Christian Witt: That’s right. Garbsen close to Hannover.
History of LPKF: The laser specialist
[00:01:09] Tilman Versch: Great and I’m looking forward to an interesting debate with you about LPKF. And LPKF isn’t the easiest company to understand as I have learned during the preparation for this interview. So maybe you could try to explain to me. Imagine I’m a 5-year-old guy, like a bit smaller. And what is LPKF doing and explain it in a very basic way that everyone can understand it.
[00:01:40] Christian Witt: Happy to do so. I think we’re actually not that complicated as a company. What we do is that we are laser specialists for certain laser applications. So we use laser tools, we develop and commercialize laser tools to have specific solutions for customers.
What we do is that we are laser specialists for certain laser applications. So we use laser tools, we develop and commercialise laser tools to have specific solutions for customers.
And that can be as small as a prototyping equipment for small PCBs, so that any developer who wants to develop a new electronic device or wants to change its electronic device components can easily, confidentially and quickly do a prototype of this new PCB which she wants to produce seriously in the future. And it goes up to a huge solar equipment where we do a structuring of thin film solar panels. And by doing that, and we’re doing that with laser, with our technology, we make sure that we maximise the electricity to be generated from each of these solar modules. And that we, on the other hand, make it more and more affordable to produce these panels on the other hand. So that’s a bit the bandwidth of things we do. And within that we have quite a few fascinating areas. For example, the technology that can make glass bendable which is one of the many applications, new applications of our glass technology.
[00:03:15] Tilman Versch: Are there any products you could give as examples where your technology is in use, maybe everyday products that people can relate to it?
[00:03:26] Christian Witt: Unfortunately, we’re not allowed to really disclose the customer names and their production technologies, but I can assure you that in quite a number of electronic devices you use every day there’s a LPKF technology used in order to produce those devices. Either today’s technology or yesterday’s technology because LPKF is a company with quite a bit of tradition and in many processes we even developed five or 10 or 15 years ago are still in used by our customers because there are still very good processes to solve their problems.
[00:04:05] Tilman Versch: I want to go into history but first let me ask, what kind of problems are you solving for your customers?
[00:04:12] Christian Witt: Well, that really depends on the application. I’ve given two examples in the beginning, like from our development area to make very quickly produce prototype PCBs when you develop a new electronic device or when you change an electronic device or any PCBs within any other device or in the solar panels. So what we solve for our customers there is do it quick and do it very confidential without giving your drawings outside. On the other hand, in the solar business, if you produce this so-called thin film technology modules, which is one of the standard technologies being used then we need to structure one big panel into many smaller cells to get the right type of electricity out of there. And by our solution, we maximise the electricity output from the module when you do that.
So what we solve for our customers there is do it quick and do it very confidential without giving your drawings outside. On the other hand, in the solar business, if you produce this so-called thin film technology modules, which is one of the standard technologies being used, then we need to structure one big panel into many smaller cells to get the right type of electricity out of there. And by our solution, we maximise the electricity output from the module when you do that.
When you use a conventional methodology then you will lose more space in this panel and therefore produce less electricity.
Let me give some other examples. When we come to our welding division, for example, now welding division, what we do is to join two plastic parts very tightly with a laser beam. And doing that enables us, for example, to have sensors either in electrical cars or in other areas being sealed into a housing of plastic. And you need that finely type of sensor because none of them wants to be destroyed by water, humidity, or anything else. So you need to house all of them, and when you house them, you don’t want to destroy or damage the sensor or electronics components when doing the housing process.
And what do we do with our type of laser application is that we use heat in only in very particular areas and not of the neighbouring areas. So we neither use heat which destroys or attacks the electronics components which we are sealing and on the other hand we are also not using electro sonic vibrations which can also damage the electronics components. And on the other hand, the connections we do with our laser welding technology, they’re incredibly tight. So you can reliably use them for 30 years and they are hard to destroy. And that’s very important when it comes, for example, the medical devices which have 100% reliability requirements, or when we come to advanced automotive applications, electric driving or digital driving where these cars should be able to go on any path however demanding it is to the components and not get any faults or cracks or anything like that and that for 20 plus years. And that’s why the technology, for example, laser welding gives the clear benefit to the customer. How do I get this sealed or other collections established in order to do that?
[00:07:32] Tilman Versch: A small follow up question. What is PCBs? What does it stand for?
[00:07:34] Christian Witt: PCBs, that’s printed circuit board. That is the little devices where you mount all the different electronic components on. The typical colour is green and a lot of electric components on one side and all the soldering on the other hand on the other side in order to connect these components with each other.
PCBs, that’s printed circuit board. That is the little devices where you mount all the different electronic components on. The typical colour is green and a lot of electric components on one side and all the soldering on the other hand on the other side in order to connect these components with each other.
And what’s so specific about these PCBs is that they have the connectors, like the connections for the different electronic components inside the PCB. And so, when we do the prototype of the PCB and there’s the design which the design house has done before, and then we put the design on that prototype so that has the right connections from one piece to the other piece of electronics on this PCB. On the end, when we have any electronic component, you see a green element where all the electronics is mounted on. This green element is the PCB.
The precision of laser technology
[00:08:41] Tilman Versch: Okay. About which kind of precision are we talking there with your laser technologies? Is it centimetres, nanometres, millimetres?
[00:08:51] Christian Witt: It’s typically in the nanometre area if you need it but that depends on the different type of application. We can do with our glass technology, for example, we can do small cavities in glass which when you fill with about one billionth of a litre of liquid. So that’s the precision and small as we can have there. Typically, it’s the nanometre area except for you don’t need it then we can do anything better.
The solar technology
[00:09:33] Tilman Versch: And coming back to the solar and point you made. What kind of efficiency are you adding by your technology, like how does the solar cell get better there?
[00:09:45] Christian Witt: Basically, when the technology was first introduced, the efficiency improvement was about 10%. So you’ve got 10% more electricity out of the module. Could be convincing, was convincing for our key customer and it is convincing for nearly all customers worldwide because we have a very good market coverage in that field.
The beginning of LPKF
[00:10:11] Tilman Versch: Just a small note. If people want to know more about those certain technologies which I’m not diving too much into today. There are also a Capital Markets Day. We recently had the link you can find below. But now, I promised we jump to the next point and that’s about your history. And you’ve come to the company in 2018, if I’m right? But you also have the chance to talk to people who’ve been in the company, like for 10 or 20 years or even more. And what do they tell you about the development of the company? What stories do we tell you? How as LPKF have changed about like the last 20 or 10 years?
[00:10:56] Christian Witt: Let me start comparing when LPKF started and how it got what it is today, and I think from that you will see what our DNA is. The company started in 1976 with that so-called rapid prototyping with PCB prototyping, which I just explained, just that it was a very simple device where you had a drawing of the PCB on the one hand side, on the other hand side you had a little drilling equipment, milling-drilling equipment. Then you had a connector and when you take a metal pan and take the drawing here then there’s a fixed connection with the drilling equipment and it just copies what you do on one side to the other hand. And on the other side, there is a PCB.
So that is the very simple start of the company. And then at some point in time you look into, well, can’t you do that with laser? And when you use the laser, you think about, well, can produce serial production for production steps with laser tube. Why? Because we know how to treat the PCB with a laser and there are certain steps in production way a laser can very well cut some of the material. So that was entering into what we call depending business, which is part of our electronics business unit.
Understanding more about this electronics production process and on the other hand having an extensive knowledge about the application of laser in the electronics industry we were able to develop machines and solutions for stencils. That is what you basically need to put the soldering paste at the back of these PCBs because you only see them solder, but the way how the soldering paste only gets to the right point is with a certain stencil which is produced in a very vast majority of the globe without the [?] machines.
So you see the evolution. At some point in time, they were talking to people from the university in [?] and then got the idea how can we use our knowledge in laser and know-how but also on the mechanics and control of lasers in order to do plastic welding. That was the birth of our welding division. And working together with an institute close to the university in unintelligible then they basically started to do precision mechanics combining that with laser application technology and what came out of that is our solar business unit.
Then we discovered what can we do when the laser hits glass because we have some general research department and they thought about what to do with glass because glass is a fantastic material. So we saw that we can find a new way of processing glass which gives glass much better properties. That was the birth of our LIDE technology. And with our LIDE technology, and that was actually after I joined the company, where we learned that that’s not only a solution for parts of the electronics industry, but it’s also a solution not only for display solutions but also for biotech solutions because it enables us to do these super small, extremely precise holder wells into a glass carrier to have certain arrays of analytic cells and areas.
And that we learned actually from customers that this is a good application. We also heard it from an investor actually with a biotech investment and that made us think about hey, is that a new field for us? So what we bring is our glass technology, but we also bring in our one of our business units is that we have devices which can very precisely move the device in a small area, change tools, and do optical controls and so forth. So basically, when we look at that you have 80% of the ingredients to build the analytics machine for such a biotechnology application. And when we saw that we have the capability and that there’s a market need, we started to go for it, we created a project, we did a prototype, we saw it works. Then we started to develop the project and we will deploy the product to the market to the first bidder customers in this fourth quarter of 2022 and then start with large scale production of the product mid next year.
So what you see is that we never stand still but we always look where can we solve a problem for a customer even though it might not be our customer today. But where do we have a great technological edge where we have a huge customer benefit and can deploy a solution to the market? The way we do that is we that we change and expand our face permanently, and that’s what fascinates people in the company, together with a very open-minded and positive human way of working which you need in order to have such a great development and deployment of technology.
So what you see is that we never stand still but we always look where can we solve a problem for a customer even though it might not be our customer today. But where do we have a great technological edge where we have a huge customer benefit and can deploy a solution to the market? The way we do that is we that we change and expand our face permanently, and that’s what fascinates people in the company, together with a very open-minded and positive human way of working which you need in order to have such a great development and deployment of technology.
And to some degree when you ask what do we learn from history? How can you see? What’s [unintelligible] like what do people tell me? That’s what they told me. That’s what I’ve seen and that’s what’s fascinating to many of our employees and also to myself.
[00:17:01] Tilman Versch: So the way you use the lasers maybe reminding me a bit of a Swiss knife like you have a knife that you can easily use for one thing, like cutting, but you also have the knives where you have more and more layers and you have the big Swiss knife, screwdrivers, and whatever.
[00:17:20] Christian Witt: Let’s put it that way that most of our lasers we buy. We are not a laser producer for the vast majority of our product. Our specialty is the application of the laser and wherever we see, hey, here we have an expertise and there’s a market then we developed this and it becomes a product line, a business line, a business unit. And that’s how we work. That’s why we also consist of a number of medium size business units. However, what we are trying to achieve is to see that we identify the best scalable solutions, not only solutions to have more customers, but also to have scalable solutions because in the end to not only provide solution to the customers, but also to have a good economic benefit from that, you need scaling. And that’s why we focus more and more on the scalable solution within our product range.
[00:18:22] Tilman Versch: So your edge is not about the lasers because you buy them from somewhere else but the laser processing, the laser workflows?
[00:18:30] Christian Witt: Exactly. How does the laser hit the material? That is one key component, key know-how. How do you control such a machine? How do you evaluate if the process was successful? How do you adjust the profits to be successful? How do you measure this? How do you view the correct positioning? Sometimes you have to work with laser in the micrometre scale. You have to be extremely fast in order to have an efficient process, but you don’t really see. You have to see through certain layers of material and so forth. We know how to do that and this combination of high precision of laser material or software know-how and understanding key markets. That’s basically our recipe on how we are successful.
We know how to do that and this combination of high precision of laser material or software know-how and understanding key markets. That’s basically our recipe on how we are successful.
[00:19:26] Tilman Versch: So your business is done more human research-based business and not like a hot and heavy asset business where you need a lot of machinery?
[00:19:36] Christian Witt: Absolutely right. When you look at the business from that perspective. We invest more than 10% of our net revenue each year into R&D because we live of always giving customers the latest edge. The way we produce is relatively simple. We buy the components, we assemble them, and then we make them work. More than 50% of our engineering software anyway and as you said production facilities we have are assembling, few assemblies.
Keeping the competitive edge
[00:20:14] Tilman Versch: You always need to spend this 10% off your revenues and R&D and to be that competitive advantage compared to other players in the field or how do you see this?
[00:20:27] Christian Witt: It’s combination of always making sure we keep our competitive edge and of building new areas. When looking at LIDE, looking at arralyze that is two new business areas and to build these you also need R&D capacity, so they’re going to both. They go into what we call permanent improvement. I wouldn’t call it maintenance. I would call it permanent improvement on our product. And they go into new initiatives. And that’s basically why we developed the company the way we did in the past years.
[00:21:04] Tilman Versch: So you’re doing a lot of bets on kind of new use cases and how do you make sure from financial standpoint that these bets are more poised to success than just basic research where you develop something new and great, but it’s not commercializable?
[00:21:25] Christian Witt: Actually we have a multistage process there, and I think that’s standard. On the one hand, in the research area we go broad. We look for opportunities, what things could be, what things might be, but before we go into development stage, we have a very clear business case where we analyse the markets, where we see the clear competitive edge versus existing technologies. And then we select the ones where we see the best opportunity to be successful in order to enter the market with this disruptive technology. And where we see a good economic potential. So we select wealth of the early and only when you look at that also from a CFO perspective, the timing isn’t always too certain. Two things take a year or two longer or shorter. That’s hard to tell, but we are very good at telling if we are successful with the technology.
[00:22:27] Tilman Versch: Well, if you see is all perspective on the 10% spent on research and development. Do you have a rough return number over time you have with this spend? Have you ever done such a calculation?
[00:22:40] Christian Witt: We are regularly doing such calculations and we will not publish the results, but we do require a relatively favourable hurdle of ROI in order to do our projects. Although we have our project approval based on certain ROI expectations and figures.
Gaining and filtering information
[00:23:03] Tilman Versch: Like laser technology is not like sounds a bit like information. Like information is everywhere or data, but in industrial processes, laser is more cornered. But it is a bit this comparison. It might help. And how do you manage this flow of ideas that are coming in and how like if someone has a process in another industry where you could use laser or how are you getting this openness and this kind of knowledge flows to you that you can select and filters?
[00:23:37] Christian Witt: Let’s take two parts of the question. How do we get the flow from the outside to the inside of the company? And that we do in a number of ways. I think the most important source is probably the conversations with our customers: knowing their road maps, understanding their road maps, understanding where there might have issues and we might have a solution. Number two, when we come to like basic research, we are very strong in research, projects, and connections with other institutes, universities but also appLIDE institutes or companies. So we do many projects in that sense which are typically, partially funded, so that’s not the biggest cost position, but it gives us and maintains us a very good network and always a good flow of new ideas of things which are coming into place.
So that’s two key things. How the ideas come to us, how we get them, how we fetch them. And on the other hand, looking at the inside of the company, on the one hand we have the organised process of developing a product. On the other hand, what do we develop? That’s known issue. On the one hand of product management. And on the other hand of research department which is very free in what they think about and what they do. And so by that we match both directions innovation could come from. Customer side on the one hand and technological side on the other hand.
The different business units of LPKF
[00:25:26] Tilman Versch: You have these four different business areas or maybe six depending on your presentation. It’s like this, we also will put this sLIDE in here like development, electronics, solar, welding, LIDE, and arralyze. And how should we think about these areas? Are there kind of silos where teams work on different problems with certain industries and customers? Or is it more like a hand that is connected that has some fingers here and here, and sometimes they could work together to craft something and move it together?
[00:26:04] Christian Witt: Development, electronics, welding and solar are the four business units of the company. And in these business units we also have the new business initiatives, LIDE, inside the electronics business and Arralyze inside the development business. In general, the business units they do sales, they do product management, and they look for customer, for R&D, for the development of their products, not R&D but development of their products and production. So that’s the way the business units are currently shaped. There is a common base when it comes to software developments, so we would use a common own-developed, self-developed platform. We have certain interconnects when it comes to R&D, when it comes to our basic research, when it comes to our technological possibilities but also, when it comes to exchanging production capacities when needed I think that’s some of the key areas.
When it comes to customers where we see the synergies, we use them but they are not too synergetic between the business units because when you look at that the solar world is thin film world that is accountable number of customers in the world. Development, even if you sell a rapid prototyping tool for PCBs into an electronics manufacturer, you deal with completely different people in the labs then you deal with when you sell a piece of equipment into production. So that is basically a separate approach because these customers need a separate approach. So we have parts where it’s good to be separate in order to be strong and focused to the customer and its areas where you need to work together very strongly and that also includes purchasing, for example, in order to take the synergies which you can in which we do take from being one company.
[00:28:13] Tilman Versch: In the different units can like talent move like from solar to development if needed or is it more like…?
[00:28:22] Christian Witt: HR, finance purchasing that’s typical group functions we have. And of course, we do a joint career development. Of course, people can move and do move between these initiatives and areas. And I think that is one of the strengths we have that we enable that.
[00:28:44] Tilman Versch: How do you get the specialised talent for the different sections? What are typical stations before they join you in like maybe solar or welding?
[00:28:57] Christian Witt: And that’s actually quite different. Sometimes we recruit experienced talent. Sometimes we get new folks, either from university for R&D or planning, or we get folks for assembly. So, on the one hand we have apprentices in the company. We train people professionally in all the different business units. And on the other hand we work very closely with universities because it’s different type of channels for different type of talent. And so far, I think hiring is not the easiest thing it has been when you look at the last 10 years at this point in time. However, for key positions in the technical area, we are always able to fill them with really good people because they see what we have to offer the company as work style unblock at this sphere also as well as when they see what they would be working with and for, that motivates people. So content and kind of mission in the same way as the human factor of the colleagues they meet when we do the recruiting process.
The deal with profitability & scaling
[00:30:19] Tilman Versch: Which parts of your businesses, if you look with investor and financial lands on them, are the most profitable parts currently?
[00:30:30] Christian Witt: Well, I think when we look at that. Look at our financials we published. Structurally, all of these business units have one thing in common. Once you go into volume, profits are something we really need to achieve. Its nearly a must. Why is that the case? When you look at our structure and you touched on that in the very beginning, 10% R&D, relatively low production cost, so our material ratio, so material we spend in percentage of our net sales is somewhere in the 30s, 30 percentage points.
You add some labour so then you get a very interesting gross margin. So whenever you are able to scale the business and that doesn’t vary from unit to unit. That’s the same for all business units. We’re going to into a very nice profitability. So basically, the keep the profitability is mainly driven by the fact if the business unit at this point in time can get a good volume. When you look at welding, they have the worst history and profitability of all business units. They’ve been lost makers for many, many years in the group, but in recent years we’ve been very successful in the welding business unit. And we’ve been successful because we have combined our expertise with the much better customer focus than we’ve done that in the past. Doing so enables us to scale at reasonable fixed cost. And then enables us to make the business unit profitable.
Development, same thing, just with a different history. Development is form of profitability and constant profitability perspective. The very best business unit we have the group. When you see scaling as you see it at the moment because they have a very good trend in terms of orders, of sales, and so forth. Then you see that profitability comes by itself. So that’s just two examples. We can see that very easily. We’ve had very profitable years in solar, however, last year we were not able to invoice our finished products in the end of the year, we had a loss but that’s driven by volume. So our profitability is mainly been driven by our ability to scale, and that’s why I said sometime earlier in our conversation, we focus more and more on the business where we can scale. And the better we can scale, the better we get to sustain profitability. It’s market differentiation and value for the customer on the one side and scaling on the other side.
The sale cycle
[00:33:31] Tilman Versch: Were scaling, you also need sales. If you look at these chart again, and you have the different industries here as consumer electronics, medical, car manufacturing, solar. These industries there you have to be precise and stand certain security tests and really be able to deliver on like 99% of 100 for the production. Maybe I’m doing it too much. You can correctly then.
[00:34:04] Christian Witt: At least. At least.
[00:34:06] Tilman Versch: And how does the sales cycle work in this? And how does sales work in these industries that an investor can imagine it? What are the time frames?
[00:34:20] Christian Witt: Let me describe you, let me give you three to four examples. And then you see the variety and the character of the different business units. In development business unit, it is projects where we have an order pipeline which you would measure in weeks. There’s an interest in the project. Sometimes it’s academia, sometimes it’s private, and then there are do attend them or they just ask for a quote. And all of the equipment get it delivered. These projects are not customised. These products are not customised, they are basically off the shelf products, so delivery time is relatively short.
And the expectation of the customers also to have it quickly in their laboratory. When you compare that with, for example, electronics or welding their lead times are longer because customers typically require some specification and notification of a standard product for their production line, for their particular application. And welding, it’s clear because every part needs different tools in order to fix them, fixtures, and then to weld them it needs a process for the particular welding product. In electronics, it’s not the same, but it’s similar.
So many of these products have a longer lead time because first, the customer needs to understand, yes, this is what I need from our production process and it’s a production process where as you said qualification and these things matter. But as we are prepared for that and we are doing that regularly we know how to do all the qualification tests. And after that then we will receive an order, do all the specifications within the order in our own development area and then produce and deliver. So that takes a few months. Not too many but few months as a typical lead time. When it comes to solar, it’s totally different because someone decides to build up a solar factory or to modernise this order factory, and that’s the process where there’s suppliers which even have a longer lead time than we do. And its longstanding supplier, longstanding customers. So we have conversations early on. We know what will come. So we know that quite a bit in advance, but the time from order to delivery is nine months plus.
So when the year starts, you know most, very most of what you will deliver within a year. So that’s three of the existing business lines of three, four with totally different characteristics. When we come to a new technology like LIDE, that’s even different because there the first time line is that the customer typically will change his specs of his next product in order to use the LIDE technology to get a competitive advantage. There are some cases where they put it as a better process into existing applications. But that is not the majority. The majority of cases here is we want to do a new application, we know exactly what we want to do, but it’s the next partnering product generation where we do a design in into that product generation.
And inside the customer there is slower ones and faster ones. No. There are some customers who say we want to do this. It’s qualified, we start, and we do it. And there’s others which have, also due to the product, longer testing cycles. And that depends really on the application inside the different area. So you can have anything from hey, give me a machine in order to improve my current process, six months. And we’ve had two of these cases recently this year. And we have on other cases when you start, it’s changing samples and ideas and possibilities with the potential customer. After a while you sign a joint development agreement and then it might take another one, two, three years before it gets into production.
We have a broad range there. What we do see is that the timing of these is heart of the sea. However, when it doesn’t come to pure timing, when it comes to the fact where we do this project, then we have a very good expertise and for seeing that. So as I said timing, we are sometimes wrong. Identifying the right areas and also interesting customers, we are very good at. And when I look back from two years to now then we would say we have something like a 70, 80% accuracy in this, and for a new technology with a broad range of applications like LIDE which has a super broad, super broad range of applications, that’s actually quite good.
[00:39:35] Tilman Versch: What range of application is there?
[00:39:39] Christian Witt: Let me give you a couple of examples for the range of LIDE applications. When we go to the semiconductor industry. You can do a type of MEMS packaging, advanced packaging in order to use glass as a better material and with perfect properties and processes. Even integrating various steps of the packaging and one step. That’s something we’ve implemented for customer. You can go into other forms of advanced packaging. Whatever level packaging of other areas in that field. You have applications with unintelligible or you basically do enable stacks of chips. That is a type of application. A number of customers are working intensely on. And that’s just semiconductor. When we go into display. In display, we have foldable displays, so to make glass foldable with help of LIDE technology and then creating some cavities and filling the cavities with the polymer basically, that’s the way how it works.
Then on the other hand, you can also cut and structure the glass for normal applications like watches or smart phones which have a much better yield and much better properties in terms of stability and non-breakability. So that’s the second type of application in display. The third type of application display is what’s called the backplane. So when we look at the smartphone display, the cover plus is just put on top. You can remove it. You can replace it. Below that is a display and the display has various layers and normally the very bottom is something which you can also make out of glass and which we can do a perforation, for example, and metalize the perforation so you can even unintelligible LEDs, micro leads or other active elements on the surface from the back. So that’s also an implication which is being put into production. You see just in display, it’s three type of applications which we are seeing. When you go further, you can do certain MEMS elements whether it’s a very good potential of different applications within these MEMS possibilities and I don’t want to go into further detail at the moment.
And then there is totally different applications like the arrays for biotechnology, which I meant before. Where you can create very precise small holes in order to do single cell analysis and not the usual this size welds we have for current methodology. Besides that there are small applications which is drilling small holes where you need it without damaging the glass and some vaporizers on the biotech sides and other smaller projects which are not something I would put in the big packets because they are not big packets but that is to just give you an idea of the bandwidth of applications of LIDE. And why is that the case? That’s the case because glass is a fantastic material, just as it’s brittle it is very difficult to work with glass the way you need it. And when you work it you typically damage it and the LIDE process enables us not to damage the glass when having ultrafine highly precise structures in them.
[00:43:48] Tilman Versch: What kind of total addressable market do you have in mind when thinking about all these options?
[00:43:55] Christian Witt: Well, the capital markets their presentation is pretty clear there. Both LIDE and arralyze have very nice three digit million euro specific addressable markets. The total addressable markets are much, much bigger, but they are not really relevant. To say I have a €10 billion total addressable market and I get 1 1/2%, that’s not the approach. The approach is to understand the specific applications and the specifically addressable market, and that’s how we work. And that’s also how we have presented that to our investors.
Reaching out to potential partners
[00:44:34] Tilman Versch: Then we are organic sales or like the relationships you have with potential customers or existing customers. So how are you going about plunging these ideas you have with LIDE in your books, to plant them in the demands of the potential partners? And where you’re already good at and where you think you could also improve in this process?
[00:45:00] Christian Witt: I think, well, how do we do it? How do you enter these large companies? Because the customers here are all the big players because of the scale effects in their products and in the technology. So, we started actually was going to Congress’s and presenting the technology and the possibilities. So that’s really for the research guys of semi display and others. Then you have to see that you enter some of these guys and enter them at the right level. So you are able to show them what the technology can do for them. Once that happens and they understand what the technology can do. And they are like ignite it a little bit. They go back and they come back with a number of other problems we never knew they had.
And then we see where we can have a solution, so that going back and forwards is very important in the process. That happens when you, once you are in one of these larger players and the key larger players are semiconductor and display. How did we get into this player? It’s very simple, because we had our own ideas that we could do a foldable display. We put the demo at the trade fair in the US, got a price and then got a lot of attention. That’s basically how we came into the display industry. How they learned very quickly about the possibilities. So that’s just two examples how we get there. When you look at the companies we work with on the display side, I think we are, for the foldables, we are exactly where we want to be and I can’t say more here. For the outline cutting, I think we are also working with the customers we want to work with. And some of our advancing well, some not. Some monopoly structures of glass production in the back are hindering here. So the OEMs have to remove those we can’t. On the similar side, it is while they are longer cycles they usually take when they understand what they can do with it. Until that goes into the next generation product.
So the ones we are working with is all names. I think some of the names people on the streets would know. Investors will know all the names. And that is not surprising because we need to work with the big players because only the big players will establish these technologies in their future portfolio. And why do they do that? Because, for example, in semiconductor, when you see that Wardlaw comes to an end, they ask themselves what’s the next step I can take to have a competitive edge over my longer peers and then back-end packaging and the combination and so forth is what comes into play and that’s where we enter with LIDE. So what do we do well? I think identifying that and that first get in touch phase that we are not too bad. Where we have had a great addition and we are learning and getting better is in professional business development and that great addition to the company. Here was Klaus Fiedler as our CEO, coming basically from that background of establishing new technologies with these large players. And that is basically where we are improving, where we’re learning a lot from him and with him, and I think that’s progressing quite well.
Self-understanding as a supplier
[00:48:57] Tilman Versch: So how hard is to manage these big tankers? To put it in this picture, I have the feeling you have a kind of more speedboat approach in the way you go. And while the others are like big tankers, and if you think about like the big producers of smartphones or something like this.
[00:49:20] Christian Witt: A very good point. What we are doing is we have built up and I continue to do that to have the full professional set we need to satisfy what they need from a supplier. They want the flexibility of those people. That’s really good. But on the other hand, they need the reliability of a professional supplier. In the approach with these customers. We have a combination of being agile, but on the other hand having very clear established processes when it comes to quality, to inspection, to certain measures, norms we have to fulfil, and so forth. There we have taken aboard the people and the organisation has understood, our organisation, that this is a combination between speed boat on the one hand and the very solid background on the other hand. And what helps us is that we have provided that two large key accounts in the past, and we’ve proven that we are reliable. And that helps us a lot because that track record is important for these large consumer electronics displays, semiconductor manufacturing companies.
[00:50:46] Tilman Versch: Do they also have certain hurdles in terms of your balance sheet because if you’re, for instance, delivered to defence, I’ve heard some companies who deliver security critical things that they have to be a balance sheet like a fortress?
[00:51:03] Christian Witt: Well, when we look at our balance sheet, it’s not that I’m not satisfied with it. I think our balance sheet is very solid and that’s important. To be in a heavily leveraged position for a technology company is too risky, so our customers value that we have a very solid position. Our customers value that we are reliable and have been reliable.
I think our balance sheet is very solid and that’s important. To be in a heavily leveraged position for a technology company is too risky, so our customers value that we have a very solid position. Our customers value that we are reliable and have been reliable.
When it comes to size they all look at us with a special eye because we are too small to be a typical supplier of equipment to them. But this hasn’t hindered any of them to work with us, and to also do corporate purchase agreements with us because they’ve seen that we are solid in the way we work, and they can rely on us. Yeah, you’re totally right. They’re not the typical size of suppliers for these customers, but that’s not an issue. When they do the CPA, the corporate purchasing agreements with us they do it for reason because they want the technology and they consider us reliable and once you have, once you are in there with one of these corporate purchasing agreements, and we’ve seen that recently you get more business. More business, a bit further out or also some business closer in time and that’s good.
[00:52:32] Tilman Versch: We are talking about a bit about the learning curves you’ve gone through over the last years. Are there any other learning curves you’re currently still in that are sharp or that you already think that they plateaued over the last years that’s interesting to know for potential investors?
[00:52:32] Christian Witt: I think the learning curve we are having with clouds. How to do the business development better is a very steep way. And the other learning curve, I wouldn’t say the learning curves are flat. That’s not us.
[00:52:32] Tilman Versch: I was mostly looking for the steep ones with a lot of changes happening.
[00:53:16] Christian Witt: I would differentiate here. There’s one area where we have an extremely steep learning curve, that’s our LIDEs, because we go into a new sector. So everything we see on the customer side is new. That is for sure the steepest learning curve.
There’s one area where we have an extremely steep learning curve, that’s our LIDEs, because we go into a new sector. So everything we see on the customer side is new. That is for sure the steepest learning curve.
When I look into LIDE. I think the trial-and-error learning curve which we might have had four or five years ago, that is different, but that was also somehow different two, three years ago. But that gets into a more… What I would say is getting more stable in the sense that we do know how to treat the projects with these large customers. And then I think we are somehow advanced in the learning curve. And arralyze as I said, that’s probably the steepest part.
[00:54:09] Tilman Versch: What are your internal estimates for when these learning curves and these new products like LIDE and Arralyze will materialise in scale and profitability increases?
[00:54:24] Christian Witt: When Klaus came on board, he had a very thorough look at the company, markets, technologies, the organisation, and he was also looking into our conversation with customers and so forth to follow his own view of how he sees the company as CEO and as the key driver of strategy and future business. And what we’ve done then is at the point in time where we had advanced our analysis. We have taken out the previous 2024 guidance. And we have given a clear indication to the market how we see the company midterm. Well we have not specified midterm because one of the learnings is you cannot tell if things happen a year earlier or year later. That’s very difficult in these technology processes. But in the midterm perspective, I think we have given a clear idea where we think our new technologies will go, three-digit million euro sales. And there are core business. Our current core business is going with very attractive growth rates and yielding altogether and attractive profitability in the two-digit range.
Considering external factors
[00:55:51] Tilman Versch: In the current times, we are really shaped by external factors like wars and pandemics, and stuff like this. In your past experiences, how have these external factors which can or like in the future if the external factors are happening which can increase the speed of your success, which can slow the speed of your success?
[00:56:17] Christian Witt: There’s a number of things we’ve seen recently. When we look at the current turmoil in the supply chain globally that has actually helped our development business unit because there is just a bigger need to change designs very quickly, electronics designs. And when that’s needed, people love to have our equipment. When Corona came, people didn’t go into the labs. They are back to the labs. Once they’re back to the labs, they need equipment and they’ve had at a lower investment level for two years now. We see, we see that this is going back to normal even a slight catch up. So we see a very positive effect there. Same direction is when you look at global tensions. I think the willingness to give designs outside due to spying is decreasing.
And that the other increases the demand for in-house prototyping as we are offering with our development business unit. When we look at electronics, dynamics are different. There’s many customers who negotiate deals with us and then the deals go into the draw. That hasn’t happened that way three years ago, but it does happen now. So why is that the case? Because they are not sure when they will get components and business and they won’t install a new line when they don’t know when do I get business? When do I get components? So here we are already in a quite negative position. The question is if there’s more turmoil, what will happen? Can that get worse? Or can it only get better somewhere in between?
I think things can always go worse. We should never be so narrow minded to think that we are in the worst point. That’s unlikely. But I see much more potential upwards than downwards there because we are already in the position where we are in the whole industry. So when you take cycles or super cycles, we’re definitely not in the upper part. We are definitely somewhere in the low or lower part. When it comes to welding, it’s a bit of both. So we have same in electronics and welding lots of innovation here in the market. So serving new medical customers, deploying new applications also in electronics. That’s what’s fostering our sales at the moment and for the future, that’s actually good base because you get repeat business at some point in time, and you still might at some point time get repeat business for what you sold three years ago. But that won’t happen until the curve the economy goes up.
So actually when I look at those, I’m quite confident. Medical is not too affected by downturns, automotive is. However, they will not jeopardise digital driving and they will not jeopardise the electric driving. So whatever we do in these fields, and they are increasingly more important in welding is likely to be slightly affected. No one is unaffected but slightly affected. Solar is total opposite. Solar customers don’t care at all about global turmoil. They care about global energy shortage and green energy, and they do that in the US, in Europe and even in China. So basically, what we see there and what we will see there is strong demand. Totally independent of any business cycles.
Going into new business initiatives. LIDE that’s a little bit the topic where customers which ask themselves, hey, great new technology, I can improve my product, I can get a competitive edge. Start to weigh it against the risk in their supply chain. And when they currently have a risky supply chain, their likelihoods to or their willingness to speed and take a risk is just a bit lower than it was two or three years ago. So that has changed to the negative. That will means that things might take a bit more time here, and that is partially a reason why we had to take out the guidance for 2024. This delays or slower development than what we expected with new LIDE application. Arralyze, too early to tell. All business we do there is new. So it’s all growth, that’s the question of speed. I would expect that Arralyze is relatively unaffected and independent of business cycles. The only part that we see anything in terms of cycles, we have a slight indication and welding that standard out. The motive is cautious, but that’s not unexpected.
[01:01:40] Tilman Versch: How much of your revenue is recurring?
[01:01:46] Christian Witt: We have 25 to 30% plus minus recurring revenue. Yeah, plus minus.
[01:01:55] Tilman Versch: Is this plan to increase in the future or…?
[01:01:58] Christian Witt: That will to some degree increase in the future because we are working on that heavily. When I joined the company, the motor was services expensive, we shouldn’t afford too much service personnel. Current management board and also previous management board has the attitude that service is gold for the customer and gold for us, gold for the customer because he’s happy, gold fast because we earn money. So that’s why we are increasing here and also increasing workforce. On the other hand, the question might be what grows faster, equipment or service? And typically, the service depends on the installed base. And when you have a high growth and new equipment, the new equipment could even grow faster than service. So you have two tendencies structurally it will increase.
Community exclusive: customer concentration
[01:02:58] Tilman Versch: Thinking of your customer base, is there a risk that if one customer sneezes, you will get the cold in certain areas? So is there a high concentration? I’ve heard in solar you just have one customer for instance.
Hey, Tilman here. I’m sure you’re curious about the answer to this question, but this answer is exclusive to the members of my community, Good Investing Plus. Good Investing Plus is the place where we help each other to get better as investor day by day. If you are an ambitious, long-term oriented investor that likes to share. Please apply for Good Investing Plus. Just go to good-investing.net/plus. You can also find this link in the show notes. I’m waiting for your application. And without further ado, let’s go back to the conversation.
Transitioning to service
[01:03:51] Tilman Versch: Can we maybe jump back to the point on service you made and give a bit more light on the details of this transformation you’re doing? Like from a more machine selling business to the service components wearable service, where you come from, what kind of service models do you do?
[01:04:10] Christian Witt: Let me give you a couple of examples. Traditionally, the company has basically sold products and had to do service or ask others to do service for them as that was not a good idea but it was done. What we do today is we offer service. We offer service contracts. We offer different categories of service contracts as products with additional benefits to our customers like extended warranties and things like that. This is type of package we’re offering to our customers. So we sell it proactively. Number two, we have more upgrades which we have partially already established as a small growing business without within our business units and we are strengthening that further. Upgrades are of great value to the customer and there can be of great value to us, so this is something we’ve strengthening. And in some areas, we can also add features. And call it an upgrade called The Feature. That’s also way to make money in the after sales area.
So that’s just a few examples which I’m giving. When you look into consumables. That is something we are doing in our development business unit as this is a process where we need, we need some consumables for certain process step. And we will have it very strongly in the arralyze field. So arralyze, contrary to the other fields is something where you have an equipment business, a service business, and you have a consumable business which is significant because the little chips where you do the single cell analysis with and other types of analysis. If it’s microstructures, it can only be done well with LIDE. That’s not because we would prohibit it. That’s because it is it technologically enabled LIDE and cannot be done with traditional glass shaping technologies. So in the future when it comes to LIDEs growth you will rather see that it’s equipment and then service business. When it comes to our arralyze, it is equipment business and consumables business.
[01:04:10] Tilman Versch: With service you already mentioned that you weren’t taking service revenues yourself, but also unintelligible it and now you want to take them in your packages. How replaceable are you then on this the service side? So is it easy for other company for companies that you’re supplying to take other service people? And if you take them the service or can win them for service, how big is then your margin potential from the service if you are replaceable?
[01:07:11] Christian Witt: Let’s put it that way. In the LDS business, the company had the strategy to educate the customers and to enable them to do the service themselves or to have it done by third parties. If you do that, you are extremely replaceable because you asked to be replaced. On the other hand, what we do see is that when we do the service ourselves, we can always give a much better and come more competent service to customers than anyone else. And in service we are not easy to replace. For large scale customers, it’s always possible to replace some of it but we actually don’t even see that one. Even with the large OEMs, we must do the service. So the replaceability we observe very little. It’s totally different from the automotive industry. We have a huge spare parts market regulated and a lot of workshops who can do it here that is rather that you need to know how to operate the machine, and you need to know what type of things you have to treat in which way. So know-how is key here and that’s why this is unintelligible. Margins and service will be above average edit margins, but we’re also not played to the sky because we want to keep the service attractive to our customers.
Service in smaller markets
[01:08:36] Tilman Versch: Is there any market where service doesn’t make sense for you because the density of the customer is just too tiny and all they like the keeping up the level of service that has to make sense is hard? For instance, maybe Australia, I’ve heard in other companies like 2G Energy, they use other stores in Australia to maintain their machines.
[01:08:59] Christian Witt: Absolutely right. In certain markets, we ask our distributors, the service. That’s minority and it’s small markets, not large markets. On the other hand, when we look into the development product portfolio there is high calibre lasers for €300,000. We do the service, typically ourselves. Then there is five or €10,000 machines which go to schools. We cannot do that service ourselves, so we select but in the volume. So this makes sense for our customer and for us, so we do provide it.
Acquisitions in LPKF
[01:09:46] Tilman Versch: Is there a history of acquisitions with LPKF? So have you bought other companies to complement your portfolio?
[01:09:55] Christian Witt: Well, there’s some history and of acquisitions when you look, for example, is our solar business unit that was an acquisition. When you look at LTP, that was also an acquisition originally. However, I think it took too long for us to come to the product to the market. Product is now in the market, but this has taken way too long. When we look into acquisitions. We basically look only into enablers, so we wouldn’t add a business unit to have one more, that doesn’t make sense. What we would do is to see can we get some additional speed or power into our existing business to leverage our existing business with an acquisition. That’s fields which would be interesting for us.
Skin in the game
[01:10:50] Tilman Versch: My last questions. I want to talk about stocks and insider ownership. Do you like, maybe you can speak here for the whole management and also the advisor reports to your own stocks of the companies? And is it a significant part of your net worth?
[01:11:07] Christian Witt: Klaus Fiedler and myself have phantom shared plans of the company, so there’s a significant leverage of these phantom shared plans on our income here from LPKF and I think what I can say is that Mr Richard, our chairman hasn’t only purchased some stock himself but has also announced that there’s a clear plan to change the current LTI plan including all around it and make a proposal for the next AGM for new LTI plan for the management.
[01:11:48] Tilman Versch: Do we have any rough idea in which direction this plan could go?
[01:11:53] Christian Witt: Yes, but I cannot tell.
[01:11:55] Tilman Versch: Okay.
[01:11:56] Christian Witt: No, it’s in discussion and it’s the topic of the supervisory board. However, there’s discussions between management and supervisory board on the topic and supervisory board and Mr Richard has committed in the last AGM that they will go out and propose to the AGM 23 enumeration system with new LTI scheme.
[01:12:21] Tilman Versch: Then we are looking forward to this and for the end of our interview, always give the chance for the guest to add something that is of importance to him that we haven’t discussed. So is there anything you want to add?
[01:12:34] Christian Witt: I think we’ve discussed a lot of important aspects of a company. Starting from history and our DNA as an innovator and bringing new innovations to the market where we can really make a difference based on our competency. About the different business units and their characteristics about what drives us where we have the growth potentials, I think that we haven’t talked a lot about is arralyze. And just to give you a quick idea of the potential of arralyze. What do we do there, we enable single cell analysis. So analysing, treating, and recovering single cells. And to give you a quick example on how you can develop cell line. if you take 1000 cells and you see which cell is the best killer cell for tumours. When you take the top five cells out of that, you reextract them after they’ve killed the tumour cells and you try to replicate them and thereby, I find the real champions in these cells and that can you can do to cure tumours to produce insulin or whatever other single cell analysis is the best you can use for that.
And it’s not only much more efficient and faster but it’s also much cheaper, and it’s cheaper because the amount of ingredients of consumables you need is currently somehow prohibitive for certain experiments. But when we go with a number of orders of magnitudes, so we are talking three, four of magnitude, at least in the amounts of chemicals need there. There’s a significant difference also in terms of feasibility of experiments. And that’s only one small example. What you can do with single cell analysis with the arralyze with our cell shepherd. I can just invite you have a look at our Capital Market Day Presentation. There’s some more material in there. And then we’ll deploy the first pieces of equipment in Q4 to our bidder customers. And we will start a commercial launch in Spain, February, March plus-minus. And then sell the equipment starting mid of the year. We are very happy and we are very proud where we are with this product and what we can offer to the market in the world with this technology.
[01:15:20] Tilman Versch: I’m very happy to look into this at the Capital Markets Day Presentation again. Bidder customers means there could be also like a bit of delay or are you really certain that it goes into scale productions?
[01:15:33] Christian Witt: Oh, what’s the strategy of market introduction here? Number one, when it’s bidder customers, we want to learn from them. Is that exactly how you need the product or do you need more functionality. Typically, meaning lots of different software. Number two, these bidder customers are research driven and we want them to publish papers using the social part because that will be our multipliers. That will be our first multipliers in the markets, so that’s the reason, exactly, because the biotech area is very science driven and it’s very paper driven. So that is the way forward there. It’s a different way of selling, but it’s a different market and that’s why we hire people to explain that to us and to develop that with us. And that’s the path we take.
[01:16:28] Tilman Versch: Then thank you very much for the very interesting interview and your time. And thank you for the audience for staying till here. Bye-bye.
[01:16:36] Christian Witt: Thanks very much. Bye-bye.
[01:16:40] Tilman Versch: As another video, also here is the disclaimer. You can find the link to the disclaimer below in the show notes. The disclaimer says, always do your own work. What we’re doing here is no recommendation and no advice, so please always do your own work. Thank you very much.